Consistent Valuation of a Finite Stream of Cash Flows with a Terminal Value

33 Pages Posted: 29 Apr 2002

See all articles by Joseph Tham

Joseph Tham

Educational Independent Consultant

Ignacio Velez-Pareja

Grupo Consultor CAV Capital Advisory & Valuation

Date Written: April 2002

Abstract

If the forecast period is short, then the specification of the assumption for the calculation of the terminal may be an important element of the valuation exercise. To be specific, with respect to the reference year 0, the (present) value of the terminal value may be more than fifty percent of the total levered value.

In this teaching note, we present a numerical example that values consistently a finite stream of cash flows with a terminal value from three different points of view: the Adjusted Present Value (APV) approach, the Capital Cash Flow (CCF) method and the traditional after-tax Weighted Average Cost of Capital that is applied to the Free Cash Flow (FCF). We assume an M & M world.

JEL Classification: D61, G31, H43

Suggested Citation

Tham, Joseph and Velez-Pareja, Ignacio, Consistent Valuation of a Finite Stream of Cash Flows with a Terminal Value (April 2002). Available at SSRN: https://ssrn.com/abstract=306144 or http://dx.doi.org/10.2139/ssrn.306144

Joseph Tham (Contact Author)

Educational Independent Consultant ( email )

Ignacio Velez-Pareja

Grupo Consultor CAV Capital Advisory & Valuation ( email )

Ave Miramar # 18-93 Apt 6A
Cartagena
Colombia
+573112333074 (Phone)

HOME PAGE: http://cashflow88.com/decisiones/decisiones.html

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